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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Corporation
2222 Kalakaua Avenue

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Honolulu HI 96815

Phone: 808.791.9888
Fax: 808.791.9898
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On March 12, 2009, General Electric's long standing AAA credit rating was cut to AA+ by Standard & Poor's.  GE stock rose on the announcement, leading many pundits to opine that "the market" was happy that the downgrade was not more severe.  On the other hand, credit default swap spreads for General Electric for five years were indicated on March 19 at 723-746 basis points, a level firmly in the junk range.  Who is right?  The CDS market participants or Standard & Poor's?  Judging by S&P's own past behavior, the evidence is clear that the current rating of AA+ is still far better than S&P on average would award to companies with attributes similar to GE.  The best available estimate of average S&P behavior is BBB, much closer to trading levels in the credit default swap market

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Now that major financial institutions and companies world-wide are sensitive to the macro factor risk they face, implementation of accurate valuation and stress testing with respect to these macro factors is very important.  In March, 2009, U.S. bank regulators mandated the 19 largest banks to stress test their portfolios with respect to changes in home prices, real gross domestic product, and unemployment rates.  This post talks about how to do this when the number of counterparties is realistic--that is, too large for a brute force approach.  "Reduced reduced form models" are the answer and a key to what Kamakura does in both Kamakura Risk Manager and our Kamakura Risk Information Services KRIS-cdo credit portfolio management simulator.

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The popular press is filled with stories quoting the probabilities of default for big public companies based on the credit default swap market quotations.  This analysis, however, assumes that the credit default swap represents nothing but default risk.  Nothing could be farther from the truth--the spread is where the supply and demand for credit are equalized, and default probabilities are just one element in supply and demand.

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Many banks have ended up owning complex structured products where trading has ground to a halt.  How can a financial institution efficiently mark these complex securities to market using state of the art risk technology?  A regional bank in the United States summarizes the process of best practice FAS 157 valuation in its December 31, 2008 10-k filing with the Securities and Exchange Commission.

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Bob Jarrow and Don van Deventer examine recent errors in agency ratings and implications for the future in this post, which appeared on www.riskcenter.com and www.garp.com on March 9, 2009.

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